The Basque Country: Spain's effective but expensive antidote to secession

Sonya Dowsett

FILE PHOTO: Protesters carry Esteladas, Catalan separatist flags, and Basque flags, during a rally in favour of a referendum on independence from Spain for the autonomous community of Catalonia, in the Basque city of Bilbao, Spain September 9, 2017.

Reuters/Vincent West/File Photo

(This Oct. 9 story has been refiled to add a dropped word in the headline)

By Sonya Dowsett

BILBAO, Spain (Reuters) - As Spain and Catalonia head toward a constitutional collision over the region's claim to independence, lawmakers on both sides of the crisis are pointing to a way out: north, to Basque Country.

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Among the verdant mountains of Basque Country, which borders France, a once-violent campaign for independence has petered out, with generous fiscal autonomy from Madrid helping to keep popular agitation for independence in check.

"We don't have that economic resentment," Aitor Esteban, organizer for the Basque National Party in Spain's parliament, told Reuters in an interview at party headquarters in Bilbao.

"People don't feel that need to act upon a grievance about money; that makes a big difference."

The Catalan government is not calling for a Basque-style deal, insisting instead on independence after declaring overwhelming support for secession in an Oct. 1 referendum banned by Madrid.

But the most moderate lawmakers in the region's ruling coalition privately say they could drop independence claims if they were given the tax autonomy that Basque Country enjoys.

In Madrid, some socialists have suggested it could serve as a model for a compromise that would defuse Spain's biggest political crisis since a failed coup in 1981, although the cost to the central government would be significant.

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Basque staged modest protests over Madrid's violent crackdown on Catalonia's referendum, but the crisis has failed to rekindle secessionist fervor on the streets of Bilbao, the Basque capital nestled on the banks of the Nervion.

Catalan flags hang from balconies alongside the Basque flag in a sign of solidarity, but Bilbao is prosperous and peaceful. Where once unionist politicians needed bodyguards and car bombings were a constant fear, tourists now crowd the taverns of the old town and the world-famous Guggenheim museum.

Just 17 percent of Basques want independence and less than half would like to hold a referendum on the issue, according to a poll carried out by the university of Deusto.

Basque militant group ETA, which killed more than 850 people in a decades-long campaign to carve out a separate state, effectively ended its armed resistance this year when it surrendered its weapons.

The region now has one of the highest economic outputs per capita and one of the lowest unemployment rates in Spain.

"The independence debate is on standby in Basque Country because of great fatigue after years of violence and uncertainty after the economic crisis," said Xabier Barandiaran, professor of sociology at Deusto University.

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CAN SPAIN AFFORD IT?

Basque's fiscal autonomy is among the most generous of any region in Europe, dating back to the 19th century and enshrined in Spain's 1978 constitution.

If it were to be extended to Catalonia, an economically more powerful region accounting for a fifth of national production, the Spanish state would lose about 16 billion euros, according to a 2014 study by research house CSIC.

That would equal about 13 percent of next year's budget and affect Spain's deficit and borrowing costs.

For that reason, Spanish Prime Minister Mariano Rajoy has ruled out such generous treatment for Catalonia.

Under Basque's accord with Madrid, the region collects nearly all its own taxes, which are forecast to total 13 billion euros ($15 billion) this year.

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It is due to return 800 million euros to Madrid in what is known as an annual quota to cover the costs of national expenses such as defense or infrastructure.

Rajoy has sweetened that arrangement since he regained power at the head of a minority government last year, as the price of securing Basque National Party support for his 2017 budget.

It has proved unpopular with other regions who would almost certainly oppose any similar deal for Catalonia, as it would mean cutting their share of state revenue.

Typically, regions pass taxes to Madrid which redistributes money back to them according to a formula that favors the poorer regions.

Former Catalan leader Artur Mas tried to hold talks with Rajoy in 2012 about granting Catalonia powers to raise and spend its own taxes, but the prospect of negotiations in the current climate look bleak.

Catalonia has long said it pays a disproportionate level of taxes to Madrid in relation to the central funding it receives.

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A study backed by the Budget Ministry says Catalonia pays to the state 9.9 billion euros more than it receives. The Catalan economy ministry says this is even higher.

Economists say an overhaul of the fiscal relationship between Madrid and the regions is overdue because the current system has led to intense tax competition between regions. Some autonomous communities have become under-financed, resulting in cuts in public services.

"Now the situation is so critical, there might just be the political momentum needed to tackle it," said Antonio Garcia Pascual of Barclays Capital.